There is no doubt we are all working longer and harder for our money these days, so it’s important your money is working hard for you.
Although investing can seem intimidating or complicated at first, it doesn’t have to be a complex process. All that is required is some basic knowledge, plenty of patience and some guidance to make your investments grow exponentially for retirement.
When it comes to investment options there are a myriad of choices available and at times it can be overwhelming.
I am sure you have heard from friends or colleagues over a BBQ tell you how much they made from investing into a particular stock and buying low and selling high. In reality, these stories are quite rare. In fact, the majority of wealthy individuals I know, have built their wealth by applying disciplined investment strategies over a long period of time.
Below are some strategies and tips to consider when embarking on your investment journey.
Investment Vehicle (Structures)
Living and working in Australia means that you are residing in one of the highest income-taxing nations in the world. As Doctors are generally considered high income earners, it is important to consider what structure to invest in before you hand over your money. Every investor has a different situation and what might work for one investor may not necessarily work for the other. For example, if you are already on the highest marginal tax bracket, it may not necessarily be the best idea to be adding future capital gains to your assessable income. You can use different legal structures to ensure your outcome is the best possible in terms of your tax liabilities.
Tax planning is a complex area and its best to consult with your Financial Adviser or Accountant before investing. Below are some examples of common structures typically used:
- Family Trust
The old adage ‘don’t put all your eggs in one basket’ is definitely true when it comes to investing.
Diversification helps you ride out all the ups and downs of financial markets by spreading your hard earned money across different asset classes. It will leave you less exposed to a single economic event, so if one market, industry or company isn’t doing so well, you won’t lose all your money and will be less impacted.
The goal of diversification is to reduce overall investment risk and volatility of returns in your portfolio.
Don’t get caught up in the hype of an individual stock and lose all your money. If you really fancy a particular company, limit your investment to a small proportion of your portfolio unless you are prepared to lose it all.
Time in the market, not timing the market…
Investing is a marathon, not a sprint. Whether you invest in stock markets or property volatility is always a factor. Not even the most sophisticated fund manager or analyst can predict how a company, market or economy is going to perform, even with the most thorough research and technology at hand.
The key is to take a long term view and invest money regularly in small amounts. This is often referred to as ‘Dollar Cost Averaging’.
Keep your emotions away
Investing in stock markets or property can be an emotional roller coaster at times. It doesn’t help when the media play on these emotions when negative world events occur and make headlines with the intent of selling newspapers. Just remember, markets are cyclical and will naturally go up and down.
The key is to not let your emotions get in the way. If you have set your investment time frame, the gain or loss is only on paper and hasn’t been crystallized.
Have a simple investment philosophy
If you don’t understand the investment you are getting into and you can’t explain it simply to your family member or friend, then you should probably stay away from it.
There are a myriad of complicated investment strategies out there and people trying to convince you that they can outperform the market. Some do, but most don’t and not consistently.
The best investment strategies are often very boring in nature, but they usually work well. One of the simplest methods is to invest in an index fund that mirrors the return or a particular market. This ensures a benchmark return at a low cost.
An alternative is to carefully construct a portfolio of mutual funds that invest into various markets/sectors with both a growth and income focus.
Consider the fees
Investment fees can erode your returns if you are not careful. Just remember, every time you pay an investment fee, this is money that doesn’t get invested to potentially provide you a return. Of course, fees are a necessary evil but it pays to do your research before investing.
Some common fees you should be aware of are:
- Entry & Exit fees – this is the fee charged by the fund manager as a one off upon entry or exit of the investment and can sometimes be as high as 4% – 5%.
- Transaction fees – this is the fee charged every time you buy or sell a share in a company or units in a managed fund.
- Annual fees – this is the fee charged by the fund manager or investment house for managing your investments. These fees typically range between 0.30% pa to 3.50% pa.
Just remember, selecting a fund with higher management fees doesn’t necessarily mean you will receive a greater return.
Consult a professional
Yes, you could probably invest the money yourself if you have the interest, energy and time. If not, leave it to the experts.
Always consider seeking wise counsel from a Financial Adviser you can trust.
Look for an adviser that charges a flat fee to manage your investments for you to ensure no conflict of interest. This will ultimately save you a lot of money in the long term, as opposed to advisers that charge you a percentage of your portfolio balance.
A good adviser will take on the role of a coach and ensure you understand everything about the investment process before you commit.